Inflation has been a serious setback in the post-pandemic recovery. Key measures of inflation increased 7% in 2021, and we don’t seem to be finished with it just yet. Small business owners face additional challenges due to inflation. 22% of small business owners say inflation is their number one concern. How do you keep ahead of it?
Many companies continue to make great profits, despite inflation. You can too—but it will require keeping a careful eye on the market. You can’t count on the supply costs, wage costs, and pricing standards of the past.
Increasing Costs
Inflation doesn’t happen uniformly across the economy, all at the same time. You may find some supplies you use are priced the same as ever, while others increase or even double. Gas and energy are increasing quickly. Lumber, while not back up to its peak last year, is rising in cost again as well.
In some cases, you may be able to keep your costs under control by shopping around. If your current supplier is hiking prices, someone else might have the same item for less. In other cases, you might need to adjust your supply budget to account for the extra costs.
Next, consider wages. If prices are rising in your area, your employees will need a raise to maintain the same standard of living. Rents, food, and more will leave their paycheck having farther to stretch.
At the same time, unemployment is low and the labor market is tight. Don’t risk losing your employees to better pay elsewhere. Keep tabs on what your competitors are paying, and don’t pay significantly less than they do.
Increasing Your Prices
If cost increases are hitting your bottom line, sooner or later, you’ll have to raise prices. Look around at competitors’ prices to get a sense of the going rate for your products and services. If you want to charge more than your competitors do, you’ll need to make sure your products are superior enough for customers to still choose you. On the other hand, if you charge less and are hoping to appeal to thrifty customers, you may need to run the numbers to make sure you’re still making a profit now that your costs are up.
You don’t have to raise all prices across the board. Consider which products or services can most afford a price hike. Leaving a budget option still available can keep you from losing customers.
Debts and Investments
It’s good to have a cash cushion in your business, but remember that cash is a depreciating asset right now. Keep the majority of your company’s funds in investments, such as treasury inflation-protected securities or certificates of deposit. That way, your savings can keep pace with inflation.
An inflationary market is a great time to refinance any debt you have. You are likely to access much better interest rates now than you will be able to later this year. If you have high-interest loans, now is the time to get them consolidated under a better interest rate. Consider a 7(a) loan from the Small Business Administration for debt consolidation or capital expenditures.
Don’t Let Inflation Weaken Your Small Business
Inflation can be a rough time when you own a business. But on the bright side, consumers are eager to spend. If you play things right, this could be a very profitable year. For advice on managing your small business’s finances, contact us to be matched with the perfect financial advisor for your situation.
